Debt Consolidation vs Personal Bankruptcy: Which Debt Solution is Best for You?

A quick internet search for debt management strategies can turn up a flood of ads, plans, and urgent advice. Two of the most common options? Debt consolidation and personal Bankruptcy. That raises the question: which solution is truly best for you?

Debt Consolidation Loans

A debt consolidation loan is a single loan that pays off all your existing debts, leaving you with just one monthly payment—ideally at a lower interest rate.

For many, this is a great solution, so the biggest challenge is to qualify. Refusals do occur, for any of the following reasons:

• Insufficient monthly income
• Lack of job stability
• Not enough collateral
• No consignor or guarantor
• Unfiled income tax returns
• Age
• Self-employment

We’ve seen the odds of qualification improve if you have all of your debts at the same financial institution. Banks appear more agreeable if you plan to pay off the credit card(s) and line of credit they provided. If your debts are spread around several different lenders, it is a bit of a harder sell.

If you qualify for a debt consolidation loan, be sure to examine the new monthly payment. If the interest rate isn’t meaningfully lower than what you’re already paying, consolidation may not offer any real benefit. Sometimes the new loan actually requires a higher monthly payment!

What if I Own Real Estate?

Home ownership can change the picture if you are trying to consolidate unsecured debt (credit cards, lines of credit, or payday loans). Lenders view real estate as good collateral, which can make it easier to qualify.

You may also increase your mortgage to free up some home equity and pay down money owed. If your mortgage holder won’t loan any funds to you, we recommend discussing your situation with a mortgage broker.

Pro tip: watch out for unusually large administration fees!

Other Debt Consolidation Methods

Virtually anyone can advertise as an expert in debt consolidation. Whether as a private company or a non-profit society, there are organizations that will promise you debt relief. But can they deliver? Here are some common problems that we have seen with unregulated debt management plans:

• Not all creditors agree to participate
• Unlawful rates or monthly payments
• Large up-front and ongoing fees
• No income tax debt coverage
• Advice to not pay your minimums, which just hurts your credit score.

In contrast, the Federal Government has provided programs for all Canadians, from the east coast to Vancouver Island, with regulated, safe ways to consolidate unsecured debt.

What About Personal Bankruptcy?

Personal Bankruptcy gives individuals or companies direct relief from creditors. Bankruptcy in Canada is governed by federal law, designed to help the honest but unfortunate person obtain a fresh financial start.

Bankruptcy can have several advantages over other debt consolidation strategies:

• Once filed, you receive a stay of proceedings that stops virtually all collection actions, including court and Canada Revenue Agency actions.
• It can be There is a set timeline where a person can obtain a Certificate of Discharge on an expected date, as soon as nine months after starting.
• You file via Licensed Insolvency Trustees, professionals regulated by the Federal Government for the protection of the public.
• Common creditors must participate.

Another Federal Government Option: Consumer Proposals

Consumer Proposals are another excellent debt solution administered by a Licensed Insolvency Trustee office. You offer to repay your creditors a portion of what is owed over time. The amount proposed will vary depending on your assets, income, and family situation. It has become one of the most popular methods for Canadians to consolidate their unsecured debt.

Consumer Proposals tend to result in a monthly payment that fits your budget, along with a stay of proceedings like you would receive if you filed for Bankruptcy. Creditors also prefer Consumer Proposals because they provide a better recovery compared to Bankruptcy.

Pro tip: Before agreeing to a consolidation loan, talk to a Licensed Insolvency Trustee. We might be able to provide you with a better debt relief option and payment plan. Remember, a call to our office is free, so there is no cost to talk to us.

Conclusion

Even though you might feel the urgency of your debt situation, there is often more time available than you realize. A debt plan is a big decision, and should be treated as such. We recommend taking the time to look at all your options. Some people will qualify for a debt consolidation loan, while others may access a lower payment plan via a Consumer Proposal or Bankruptcy.

Most importantly, take advantage of our free initial consultation. Contact us so we can discuss your specific situation. This will ensure you have all the information you need to make a good choice. There is no referral required; feel free to contact us today.